INDONESIAKININEWS.COM - Your retirement is likely to be the largest single financial goal you'll ever have to save for. Indeed, reachi...
Indeed, reaching a comfortable nest egg is a task that will probably take decades to complete.
Despite the time involved, there's a straightforward approach that can help you get there faster.
Indeed, if you follow the strategy, you could even get to the point where your account balance is around 10 times the spending amount you gave up by contributing to your plan.
Even better, once you put the plan in motion, the approach can be automated enough that you might even have the opportunity to 10x your retirement savings while barely lifting a finger.
Although that may sound too good to be true, it's important to recognize that while the strategy is feasible, even under the best of circumstances, it still takes time to get there.
These four steps are all it takes to put you on the path to where that straightforward 10x is in the realm of possibility.
Step 1: Sign up to max out your 401(k) match at work
Many companies that offer 401(k) style plans offer matches for employees who contribute to the plan. Although details vary from company to company, a typical match is 50% of your contribution, up to some percentage -- such as 6% -- of your salary. That match is key to helping you reach your goal.
For the sake of making the math easier to follow, assume you make $60,000 a year -- $5,000 a month.
Also assume that your employer offers that fairly typical 50% match, contributed at the same time that you make your contributions.
As you sock away 6% of your salary -- $300 per month -- your employer would add another $150, making the total saved for you $450 every month.
In addition to the employer match, what makes this step so very helpful on your journey is that 401(k) contributions are typically made automatically from your paycheck.
So once you sign up, you don't need to put in effort for them to continue, every single pay period.
Step 2: Pick the traditional style of 401(k) contributions
There are generally two different types of contributions you can make to your 401(k): traditional or Roth.
With a Roth plan, you pay taxes on the money before you contribute it, but you can typically take qualifying withdrawals in retirement completely tax-free.
With a traditional plan, you get an immediate tax deduction, but you have to pay ordinary income taxes on the money when you withdraw it in retirement. For either type of 401(k), the money grows tax- deferred while in the plan.
The key benefit of a traditional plan is that with an immediate tax deduction, it costs you less out of pocket to make a given contribution amount.
With that example salary of $60,000, you'd likely be in the 22% federal tax bracket. Adding 3% for state taxes would bring your total marginal tax burden to around 25%.
Thanks to that deduction, the $300 per month you're socking away really only costs you around $225 out of pocket.
With the $150 employer match, you have a total of $450 -- and between your contribution, the tax deduction, and your boss's match, the balance in your account has already doubled your out-of-pocket cost. And best of all, you're just getting started.
Step 3: Invest in a broad-based, low-cost, index-tracking stock fund
Getting money into your 401(k) might be the toughest part of this strategy, but figuring out where to invest your money once it's there is equally important.
Fortunately for you, investing in a broad-based, low-cost, index-tracking stock fund is a simple strategy that very often beats Wall Street's best and brightest.
As a result, if your 401(k) offers such a fund and you have enough time to let the market work its magic, investing in a broad-based, low-cost index fund can be a great idea.
Between its simplicity, low cost, and market-tracking potential over time, it's a low-effort way to invest while seeking to 10x your retirement money.
Step 4: Wait, patiently
How long it takes for your money to 10x from this point depends on what rate of return you earn along the way.
To 10x the out-of-pocket cost of your first investment ($225 out of pocket, $450 with the help from your boss and the tax deduction), your money would need to grow to $2,250.
At a 10% annualized return rate, it would take just under 17 years. At 8%, it would take just under 21 years; at 6%, it'd take closer to 28 years.
Although stock-market returns are never guaranteed, returns somewhere in those ranges would be in line with the market's historical long-term performance.
Once you've reached the target: Congratulations, you've successfully multiplied your initial out-of-pocket retirement savings by 10, while barely lifting a finger along the way.
And even at the low end of that return range, you can achieve it well within the length of a standard career.
For best results, keep on investing
This remarkably simple four-step strategy does give you a great shot of reaching that 10x goal with your retirement money.
Still, a one-time investment almost certainly will not be sufficient to build a substantial nest egg all on its own. Keep making those investments throughout your career, though, and you're talking the potential of some real, life-changing money.
That $450 a month invested on your behalf could even grow to be $1 million by the time you retire. At 10% a year, it'd take almost 30 years. At 8%, it'd take almost 35 years. At 6%, it'd take nearly 42 years. That's quite some time, but it's still potentially achievable within a career.
Even then, once you've started the contributions, you're still doing very little work while amassing a million-dollar nest egg. That's not a bad potential endpoint for such a simple strategy.
Of course, the key to the whole strategy is time. The sooner you get started, the more of that time you have available on your side, and the better your chances are of building a decent nest egg by the time you retire.
So get started now, and whether you have the time to 10x your money or not, you can at least give yourself a much better chance at a financially brighter future than if you'd never invested at all.
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Source: buffalonews